Introduction

The purpose of this report is to present the analysis and suitable

recommendations towards the decision of whether Project Chariot should beimplemented at Marriott Corporation (MC) or not. This project involvessplitting up the company into two separate entities, Marriott InternationalIncorporated (MII) and Host Marriott Corporation (HMC) in order to minimizedebt and improve the financial health of the company after severe effectsfrom real estate market crash and slowdown in the business. The descriptionof Marriott Corporation, key issues faced by the corporation, details aboutthe proposed Project Chariot and the alternatives and consequences ofimplementing Project Chariot is reported in the following sections. Finally,with the support of financial data supplied in the case, suitablerecommendations are mentioned in the last sections of the report.

Description of firm and situation

J. W. Marriott Sr. founded the Marriott Corporation (MC) in 1927 andshaped the company’s path towards huge growth and success. Marriott’smain strategy in those days was to develop hotel properties around theworld and sell these properties to outside investors while retaining long-termmanagement contracts. MC was a conservative company and it stressed thethemes of careful attention to details, the organization and its employees.Quality was one of the highest priorities set by the founder himself. In 1953MC went public, selling one-third of its shares in its Initial Public Offering.Although they continued to sell public stock, the Marriott family always kept25% ownership over the business. J. W. Marriott Sr. resigned in 1964, and hisson J. W. Marriott Jr. took over from then and immediately took a diversionfrom his father’s conservative financial policies. In the 1970s MC began touse bank credit and unsecured debt instead of mortgages to the financedevelopment which was considered beneficial at that time due to substantialhigher cash flows than the interest charges. Later, MC experienced twofinancial crises, which were due to limited partnerships in 1989, where MCexperienced a sharp drop in income and the 1990 real estate market crash.This resulted in MC’s stock prices to fall more than two-thirds, which means adrop of $2 billion in market capitalization. This was the first time thatinvestor-owned Marriott hotels went bankrupt.

Key issues that the decision maker must address

In order to improve and bring back the financial stability and alsoimprove the financial condition of MC, the then CFO proposed restructuringthe company under a project named Project Chariot. This case deals with theanalysis of the financial condition of MC and setting up relevant backgroundinformation, financial data and other considerations required to analyze thepros and cons of implementing Project Chariot at MC.Due to the economic downturn in the early '90s and the Tax Reform Act of1986, MC had limited ability to raise funds. This resulted in large interestpayments on property, which basically left Marriott Corporation with lots ofdebt. This left the organization with nothing but a fast restructuring of itsdebt policy and with it a restructuring of the company itself. StephenBollenbach, the new chief financial officer, planned on doing this change byinventing Project Chariot. Under Project Chariot, MC would become twoseparate companies. One is called Marriott International, Inc (MII), whichwould comprise MC's lodging, food, and facilities management businesses.The other one was to be named Host Marriott Corporation (HMC), whichwould retain MC's real estate holdings and its concessions on toll roads andat the airports.

Discuss any important constraints or opportunities that the

company faces Under Project Chariot, MII and HMC would have different andindependent management teams. For MII, this means that the new spin offwould include little long term debt and therefore more it would be moreprofitable, whereas for HMC this separation would mean that they wouldretain the real estate holdings, including retaining the most of the long termdebt from MC. To every upside there is a downside and in this case thebondholders would not be satisfied with this move. This split would lead thatbond rating agencies would lower MC's long-term bonds to a level belowinvestment grade, whereas the stockholders will very likely benefit from thisnew project. By saying this, leveraged buyouts (LBOs) had providedstockholders, in the past, with large profits from tender offers at premiumprices, while creating losses for bondholders in the reduced market value oftheir newly speculative investments. So called "event-risk" covenants wouldhave blocked Project Chariot or at least required any measures to protectbondholders from its potentially adverse effects, which they often did so, butat the cost of lower interest.Discuss the alternatives available to management The management could either choose to go with Project Chariot and splitthe company into two separate entities or they could stay within the samestructure and try to improve the financial condition of the company. In orderto choose the best solution to this problem the financial statements and dataof the company is studied.  Based upon MC's historical financial information for 1991, the value of the company is estimated at $3,658,000. The same calculations can be done for the two companies formed from the Project Chariot spin-off: HMC and MII based upon a projected pro forma basis, equity and debt figures for the two new entities. HMC's value is estimated at $2,600,000,000 and MII's value is estimated to be $1,200,000,000.  The key element in the restructuring plan was that HMC was to keep the debt associated with its assets, rounding to about $2.9 billion. Marriott International would then only have modest debt after restructuring. To help alleviate HMC's position, MII was to provide a $630 million line of credit to HMC, though the expiration date of the line was sooner than the maturities of many of the bond issues outstanding. It is important to know that by transferring debt the company will improve their efficiency. Since the end of the 1980's, MC's debt continuously had increased. Project Chariot could make some opportunities for HMC and MII. For HMC, it would be under less pressure of selling off the hotels at lower price from other investors. On the other hand, the MII does not take a lot of debts, and it would have the ability to raise additional capital and finance growth.  Looking at the numbers in Exhibit 5 Cash Flow from operating activities just experienced a drop in 1990. In 1991 they were back up to $552 (millions of dollars). Furthermore by issuing the convertible preferred stock of $195 in 1991 the number of cash and equivalents, end of year went down, but would have been up at $229.  As mentioned before the stockholders would gain from the change, since no cash would actually be transferred. It will also diversify the portfolio. Looking at the secured investment in the case Host Marriott Corporation will default on its debt.  The returns of the bondholders are now attached to a heavily indebted firm with massive leverage in comparison with its parent company. The lower security rating to show for it (from a BBB - Adequate capacity to pay for Marriott Corporation, to a single B - Greater vulnerability to default, but currently has capacity to pay for Host Marriott Corporation. Bondholders were never informed of such corporate restructuring plans before they bought bonds from Marriott when it is arguable that the corporation must have already been planning months before for such a major move. The central issue now is that bondholders' wealth was expropriated in favor of stockholders and it is natural that the both parties act in the way they did.

Recommendation and Conclusion

According to the above calculation it becomes obvious that byadopting "Project Chariot" have its advantages and disadvantages. The valueof the company is much higher with the restructuring. Beginning debts mightbe high in comparison with the profits, something that usually happens whenadopting a new system. However, in the long run the situation turns aroundand the company can start to gain benefits. With making two companies outof one, the debt issue is also divided. While MI can start with basically no (orlower) debt, HMC will take over the old debt from MC, which makes at leastone of the two more profitable. Furthermore, the cash flows mentioned willpropel HMC so far that it will be more than adequate to cover the debt in thefuture. Looking at the Stockholders, who will gain from this new project,through diversification of the portfolio, the only negative thing that wouldleave us, would be the bondholders. The greatest risk associated with Project Chariot appears to be the factthat HMC would assume almost the entire existing debt burden associatedwith the existing organization, while MII, with the greatest cash flow potentialwould emerge essentially debt free. While this strategy may bode well forMII, HMC emerges from Project Chariot as a debt encumbered entity with ananticipated net loss of $66 million annually. The primary sources of theexisting long-term debt of the Marriot Corporation have been issued in theform of secured and unsecured bond notes. Project Chariot does little toaddress the impact of the organizational restructuring on bondholders. Whilemanagement seems confident that the emerging HMC firm will sustainenough financial strength to make all payments to bondholders, the negativenet revenues are likely to result in a reassessment by the bond ratingagencies. It appears likely that the ratings for existing bonds will be loweredto below investment grade due to the increased investment risk which willrequire some institutional creditors to sell their holdings. In conclusion Project Chariot should be implemented at MarriottCorporation after careful consideration of Bond Risk. The management canconsider distributing the debt in MII and HMC a little more fairly so as theoverall debt burden do not affect the bond rating subsequently. MC has beenfor years a very successful business and impressed not only its shareholders,but also the public interest with positive business doing. Changes aredefinitely needed in the company due to its high debt due to systematicrisks, as economic breakdown in the real estate market as well as severaldifferent Tax Acts that threw MC back for a bit, but not as much so that theywill have to stop continuing business. Diversifying its product line, if one cansay so, meaning by implementing MI and HMC, will make the MC just morecompetitive in their field and it will help them get up the economic ladderfaster.

Quantitative Data 1. The following table provides a break-down of some critical information comparing the value of the existing firm MC and the two firms proposed, HMC and MII, proposed by Project Chariot: MC HMC MII